Shifting trade winds Blowing Lebanon’s way

Market realities push Washington and Beirut closer, but FTA still a dream

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Lebanese trade patterns are in for further changes in 2007, but it’s not armed conflict that will force alternative trade routes on the country’s many importing merchants and exporting manufacturers. Change will come because of world market realities.

Overall, according to the numbers currently available from Lebanese customs, the nation’s exports last year developed handsomely despite war, blockades and overall strains on GDP. In the first 11 months of 2006, the official statistics counted an export value of nearly $2.1 billion, driven by industrial exports and 24.7% better than in the same period a year earlier.

Lebanon’s outbound trade remained concentrated within the region, with four out of the five top destinations Middle Eastern countries. Saudi Arabia and the United Arab Emirates in the Gulf, and Syria and Iraq in the Levant together received 27.9% of Lebanon’s exports, or $579 million in goods. Switzerland, the Lebanese destination for jewelry and precious metals, was the big exception to the regional rule and returned to first place among export destinations with $431 million in goods sold or 20.8% of total exports.

Imports showed more of an impact from the summer war and remained below $8.5 billion but the ratio of exports to imports climbed to a record of 24.4%, more than double of what it had been five years ago and almost five percentage points better than in the first 11 months of 2005.

The two countries that improved their position as sources of Lebanese imports last year were the United States and China. In the first 11 months of 2006, the US was the main source of Lebanese imports, accounting for $894 million or 10.5% of total imports. After France, which sold $699 million in goods to Lebanon, China was the third supplier with $674 million, ahead of stalwart trade partners such as Italy ($622 million) and Germany ($600 million).

According to Salim Zeenni, the chairman of the American Lebanese Chamber of Commerce (AmCham), the inbound trade from the US doubled in 2006. Citing US trade statistics for the first nine months, he told Executive that Lebanese imports from the US increased by “exactly 107%” over the period.

That would mesh nicely with a new agreement that Lebanon and the US signed in December, with the optimistic-sounding name of Trade and Investment Framework Agreement, short TIFA. The abbreviation even contains the same letters as the coveted FTA, Free Trade Agreement, for which some countries have given very much to reach.

TIFA not an FTA

But the TIFA is much closer to a letter of good will than a true real-life FTA. The US State Department describes TIFA as a non-binding “consultative mechanism” of the US for discussing issues of trade and investment with another country, stating clearly that TIFAs are usually signed with nations that are, well, “in the beginning stages of opening up their economies to international trade and investment, either because they were traditionally isolated or had closed economies.”

The reason that Lebanon’s US imports soared in 2006 was purely commercial rather than linked to any negotiations, confirmed Sami Haddad, Lebanon’s minister for economy and trade. He said the increases in Lebanese imports from the US in 2006 included purchase deals for refined mineral oils as well as machinery and food stuff or the usual frontrunners, cars and cigarettes.

So in search for answers to the shifting of trade winds, one has to look to the euro, which appreciated again in 2006 and pushed the cost of deals with European traders up. Since the dollar is predicted by some international finance houses to weaken further this year, potentially causing the euro to cost more than $1.35 by the end of 2007, Lebanese importers in search of the cheapest supplies will, by necessity, seek out US prices, not to mention that they are likely to see further new offers of unbeatable prices from China.

If Lebanon wants to strengthen its trade with the US at this time, it should first seek to demonstrate its resolve to join the World Trade Organization, Zeenni said.

US diplomatic sources familiar with Lebanon’s economy agreed, on the condition that they not be named. “The WTO will help Lebanon promote itself because all international investors will be more encouraged to come and invest in Lebanon. If Lebanon is not part of the WTO, then there will be a problem,” said one US official.

“Sometimes because of political problems, there is no consistent, continuous push for WTO membership. We should do better homework because the world is giving us a chance,” Zeenni said.

Jordan, which signed an FTA with the US in 2001, is often cited as the example for the benefits of privileged trade relations with the US The country’s exports to US markets multiplied from $301 million in 1999 to $1.9 billion in 2005. Foreign Direct Investment increased by almost 500% and close to more than 45,000 jobs were created due to expansion of trade with the US.

However, it has to be noted that much of the boom in Jordanian exports to the US is in products manufactured in so-called qualifying industrial zones (QIZs.) The QIZ manufacturers can supply US customers free of tariffs and quotas if they meet requirements for joint Jordanian and Israeli value added.

A similar agreement has been implemented in Egypt but is out of the question for Lebanon, which is in an official state of war with Israel. But an FTA with the US also faces other hurdles.

One of the main barriers to joining the WTO and ultimately an FTA with the US are Lebanon’s high import tariffs and a protectionist policy that make it difficult for foreign companies to enter freely or to start a new business here, Zeenni said.

Demand to change Lebanon’s laws

It is a long-standing demand by foreign manufacturers and particularly by the US that Lebanon needs to improve and amend some of its laws regulating investment and trade as well as speed up legal and administrative procedures. The problem highlighted specifically in this context is Lebanon’s poor record of enforcing intellectual property rights.

Pirated material accounts for 75% of all software and music sales in Lebanon, while illegal cable TV connections comprise almost 100% of all connections in the country, said the International Intellectual Property Alliance (IIPA), putting a figure of more than $25 million in 2005 as trade losses that American companies incurred as a result of piracy in Lebanon.

Lebanon is a signatory to the Paris Convention for the protection of industrial property, the Madrid Agreement for the repression of false or deception indications of source on goods and the Nice Agreement concerning the international classification of goods and services for purposes of the registration of marks.

A new copyright law, No. 75/99, entered into force in 1999, which extended copyright protection to computer software, video software as well as all audiovisual works in addition to protection of literary and artistic works.

The Ministry of Economy says the law provides stronger penalties for violators and better compensation for victims of infringement. Lebanon also approved a patent law in 2000, but nonetheless IPR infringement rates here have remained above 70% while other countries in the region succeeded in significantly lowering their piracy rates that were of similar severity a decade ago.

Because of its high infringement rate, Lebanon in recent years almost lost its membership to the US’s Generalized System of Preferences, GSP, under which Lebanese companies can export to the US with nearly no custom duties.

Around 60 American companies have a direct presence in Lebanon in addition to some 300 agents of American companies, but if Lebanon were to modernize its laws and stabilize its political scene, many more investors would come, American officials have suggested, putting a decidedly optimistic spin on the outlook for bilateral economic relations.

The question is if Lebanon will gain much in outbound trade from being on the good side of Washington. Lebanese exports to the US, which consist mainly of foodstuffs and jewelry, amounted to $70 million for the first ten months in 2006, about 1.5% below 2005 levels, according to US statistics. The Lebanese customs statistics showed an even lower number, describing exports to the US in the first eleven months of 2006 as $48 million, or just 2.3% of all exports.

Even though it signed a TIFA with the US, Lebanon does not have a declared policy aim to prioritize the improvement of trade relations, Haddad said. He added that the US is the world’s number one market, and, “We are very interested in increasing our exports and establishing the best relations possible.”

Growth of exports is a very good thing. However, as the US State Department said, a TIFA in some cases can lead to an FTA, and as Lebanese officials and AmCham agree, reaching an FTA with the US will take time. A whole lot of time. Without holding its breath for such a marvel, Lebanon’s private sector can continue to develop their market powers and capabilities that allowed them to increase exports in recent years, while working and perhaps saying a prayer or two that the national conditions will improve to become conducive for smart industrial activities economically, politically, and security-wise.

 

Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years. Send mail

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